Kencana Agri (SGX:BNE) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Kencana Agri's (SGX:BNE) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Kencana Agri, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.059 = US$13m ÷ (US$318m - US$105m) (Based on the trailing twelve months to June 2023).

So, Kencana Agri has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 14%.

View our latest analysis for Kencana Agri

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kencana Agri's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kencana Agri, check out these free graphs here.

What Can We Tell From Kencana Agri's ROCE Trend?

Kencana Agri's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 51% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Kencana Agri has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 59% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Kencana Agri does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Kencana Agri isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.